The need for external expertise to pick the right investment strategies has increased as institutional portfolios’ exposure to non-traditional asset classes continues to grow. Although the importance of the role played by investment consultants in strategy and manager selection varies across different regions, in general terms investors are now more aware than ever of the benefits of paying for advice. At the same time, there are also growing concerns about the quality and independence of this advice.
Growing allocation to alternative asset classes is putting pressure on many players in the consulting industry who need to keep abreast of changes in institutional investment strategies. According to a report published by the Economist Intelligence Unit, UK pension schemes have little confidence in the ability of investment consultants to recommend innovative investment strategies and tools such as derivatives and alternative asset classes. The survey, based on the responses of 143 UK pension trustees, found that only 35 per cent of respondents rated their consultants as good or very good in these areas. Some believe that the lack of sufficient resources and research capacity dedicated to some of the newest and most innovative investment products, mean many consultants might decide to play it safe and recommend the investment strategies and fund managers they are familiar with. However, 85 per cent of trustees responding to the survey agree on the need for having external expertise.
To respond to investors’ demands for alternative asset classes, many investment consulting firms have been expanding their capabilities in the area. Some of the largest players already have teams focusing on particular asset classes such as private equity, hedge funds or commodities. On the other hand, smaller consultancy boutiques specialising on a particular type of investment have also been popping up.
Although investors have embraced the benefits of working with specialists when it comes to asset management, as far as consultancy firms are concerned many still preferred to choose someone with a more general knowledge. A report just released by Greenwich Associates says one of the first aspects investors should consider when selecting a consultant is to decide whether they need someone that can provide advice on a wide range of asset classes or someone with specialist knowledge on alternative or more innovative investment products.
In the US, for instance, some of the largest pension schemes have shown a tendency to select specialist consulting firms. The $158bn (€117.3bn) California State Teachers’ Retirement System (CalSTRS) – the second largest public pension fund in the US- has recently put out for tender the selection of an alternative investment consultant to provide advice and recommendation on the fund’s overall alternative investment portfolio, which currently represents some $20bn in assets.
Based on their analysis, Greenwich Associates has drawn up a list of best practice recommendations which investors should take into account when hiring a consultant. Apart from deciding whether to go for a specialist or an overall adviser, pension funds should also define what they really want from their consultant in terms of their involvement not only in manager selection but also on strategic and asset allocation matters. Also, the personality and style of the consultancy firm are important factors to take into account as these should mirror the personality and style of the fund’s investment board.
“It all comes back to the specific needs of individual funds,” says Andrew Klebanov, consultant at Greenwich Associates. “If you don’t put in the time at the front end to identify and rank your internal needs, your selection criteria can end up being weighted incorrectly or off-base altogether.”
At consultants Hymans Robertson, partner George Henshilwood says that when it comes to choosing alternative investments, investors are faced with very difficult decisions and it is the job of consultants to make it easier.
“One of the key aspects is education. I think there is interest [in alternatives] coming from institutions but I think a lot of this has come from consultants and fund managers putting these products in front of the clients. Quite often getting the client comfortable with the asset class can be the biggest challenge.” Mr Henshilwood adds: “I think that one of the worst things you can do for trustees is to put a whole lot of choice in front of them.” Instead consultants should present investors with ideas they really believe in and also be frank about those strategies that they think will not work for them. “I think trustees are more willing to say no to consultants if they don’t feel comfortable with the advice they are getting. So you might spend quite a lot of time talking to a client about private equity as an asset class and if at the end of the process they say ‘this is not for us’, you have to respect that.”
